Termination of trust which inherits IRA
My father, who passed in Nov 07, had a 401k which named an irrevocable intervivos trust as sole beneficiary. This trust has 4 named beneficiaries and qualifies as a look-through trust. I am the trustee (and a beneficiary) and I plan to transfer the 401k to an Inherited IRA Beneficiary Distribution Account owned by the trust and take RMD’s according to the life expectancy of the oldest beneficiary (who is 60 years old). However, this trust (established in 1968) terminates in 2012, 5 years after my father’s death, in accordance with the trust instrument. Will we then need to set up 4 new Inherited IRA Beneficiary Distribution Accounts and continue distributions according to the same schedule? Or does the trust need to distribute the entire IRA in a lump sum? In a related question, when I set up the inherited IRA BDA should I designate the trust’s beneficiaries as beneficiaries of the IRA? Thanks.
Permalink Submitted by Alan Spross on Fri, 2008-02-22 19:01
When you set up the inherited IRA, the trust only should be named on the IRA Registration per following copied from Notice 2007-7:
Q-16. If the named beneficiary of a decedent is a trust, is a plan permitted to
make a direct rollover to an IRA established with the trust as beneficiary?
A-16. Yes. A plan may make a direct rollover to an IRA on behalf of a trust
where the trust is the named beneficiary of a decedent, provided the beneficiaries of the
trust meet the requirements to be designated beneficiaries within the meaning of
§ 401(a)(9)(E). The IRA must be established in accordance with the rules in Q&A-13 of
this notice, with the trust identified as the beneficiary. In such a case, the beneficiaries
of the trust are treated as having been designated as beneficiaries of the decedent for
purposes of determining the distribution period under § 401(a)(9), if the trust meets the
requirements set forth in § 1.401(a)(9)-4, Q&A-5, with respect to the IRA.
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When the trust terminates, the BDA account should be transferred to 4 separate beneficiary BDA accounts, but the RMD calculation for each will continue to be based on the oldest trust beneficiary. The younger beneficiaries will not get a longer stretch due to the trust termination. I am assuming that there is nothing in the trust that requires full IRA distribution at any specific time, which would be the only reason for a required acceleration of the IRA distribution.
That said, it would be a good idea to have the intended IRA custodian review the trust up front to assure you that they do not see any problems with this or the ability to do separate accounting if one of the beneficiaries wants to accelerate distribution of their share. You would have to provide the IRA custodian full documentation by 10/31/08 in any event, but it will much easier on you to address these issues with the custodian up front. In some cases these custodians may want the 401k plan document but I don’t see that as necessary if employee passed after the RBD.
Of course, the first order of the day is to be sure that the 401k plan will agree to the non spouse IRA transfer, which I believe is still optional for the plan despite some back and forth with the IRS that it would be required. If the plan refuses the transfer you would encounter a time deadline this fall to get it done or be stuck with whatever the plan itself will offer. Also, be sure that any RMDs through 2007 have been taken from the plan.
Permalink Submitted by Marc O'Mara on Sat, 2008-02-23 03:13
Thanks so much for the quick response. I have been doing a lot of research and so far this forum is the best. However, the forum is quite large and I found it difficult to search for a thread which dealt with the specific issue of what happens when a trust terminates after receiving an inherited IRA. Your clear & concise answer is very helpful.
As to the 401k plan and a non-spouse beneficiary, the plan’s beneficiary form included a spousal waiver, which my mother signed when my father designated the trust as beneficiary. I’m also double-checking with the plan administrator to make sure that there is no problem with the direct rollover to the trust BDA.
Your comment about accelerated distributions raises another question: If a beneficiary is under 59 yrs old and wants to take accelerated distributions, is he subject to the 10% penalty? I would guess that there’s no penalty (other than tax) since he’s already taking required minimum distributions. Is this correct?
Two more questions:
1) I know that the trust’s BDA needs to be titled properly, e.g. “John Smith, deceased (November 7, 2007), IRA f/b/o [beneficiary]”. In the case where XYZ Trust is the beneficiary of the 401k, and Tom, Dick, Harry and Guido are the beneficiaries of the look-through XYZ Trust, is the correct registration:
A) “John Smith, deceased (November 7, 2007), IRA f/b/o XYZ Trust” or B) “John Smith, deceased (November 7, 2007), IRA f/b/o Tom, Dick, Harry & Guido”
2) When the trust terminates in 2012 and the BDA is transferred to 4 separate BDA’s, how are they to be titled? Would one be titled: “John Smith, deceased (November 7, 2007), IRA f/b/o Tom” and so on, one registration each for Dick, Harry and Guido?
Thanks again.
Permalink Submitted by Alan Spross on Sat, 2008-02-23 18:44
Marc,
Right, there is never an early withdrawal penalty for distributions to a beneficiary. These are coded “4” as death benefits on the 1099R. This applies whether the distributions are RMDs or other partial or even lump sum distributions.
Q1 – Answer is A or institutions preferred equivalent. The trust can be listed first eg. “XYZ Trust, as beneficiary of John Smith, deceased 11/7/07”
Q2 – Yes, that’s correct. The IRS only requires the names of both the original owner and the beneficiary interest and will accept it in either order. The EIN or SSN will of course be that of the beneficiary who receives the 1099R. Some institutions may have reporting conventions that better support one particular order vrs another. The DOD is not required by the IRS and therefore optional.